The crazy Auckland property market needs reining in. Capital gains tax as a way of controlling house prices doesn't work overseas, but what about a land tax?

Virtually every day there is a new story about the Auckland property market. Mostly intended to scare us that the roof is about to fall in. But there is a serious side to it all. And that is the increasingly difficult challenge for first home buyers to actually afford a home.

Of course there are many reasons why Auckland property is increasing in price. The most important is population pressure. Migrants are more likely to settle in Auckland than anywhere else. There is also a continuing trend of New Zealanders shifting to Auckland for opportunity. That is what larger cities provide. Government initiatives to boost supply have yet to make a big difference. So demand is greater than supply.

The Reserve Bank Governor certainly thinks Auckland house prices are a problem. But he is unlikely to increase interest rates, so he is unable to remove one of the key drivers of price increases

Cheap money will certainly boost house prices when other factors such as shortage of supply are present. In my lifetime mortgage rates have never been lower. While that makes it easier for first home buyers, it makes it easier still for those who have substantial equity. They can borrow and become landlords.

There is plenty of evidence that more people are renting. The number of owner occupied homes continues to fall. That means more people are renting rather than owning their own home.

So here is a two-fold problem to solve. Get more people into their own homes. And reduce price pressure.

Can tax policy play a part?

The government has already done something in respect of investment properties. It reduced the ability to deduct depreciation. But they have other tax tools. In terms of increasing severity they are, eliminating the deduction for interest, re-introducing land tax (abolished in 1988), and introducing a capital gains tax (CGT). I will focus on the latter two options.

Most other OECD nations have a CGT, including Australia. Based on the evidence from the larger Australian cities a CGT seems to have little or no impact on house prices. This seems to be because it is only ever applicable on an actual sale. Many landlords are long term holders, so a CGT is only an occasional impost. And perhaps that is not enough to affect prices.

In contrast a land tax has the virtue of being an annual tax. That means the government can predict with some precision how much will be paid annually. As part of the tax mix a land tax enables governments to plan their revenue flow.

Historically land tax was imposed on the unimproved value of land. But there is no reason why it could not be charged on capital improvements as well, though that will reduce the rate which could be charged.

What are the other features of a modern land tax? It could apply to all property being used to derive revenue. To avoid excessive land banking, it could also apply to bare subdivision land. There would need to be an exemption for land primarily used for farming. So in practise it would apply to land zoned commercial or industrial. It would also apply to residential rentals. To simplify administration the value would be the current government valuation.

The tax rate has to be sensible, probably around 1% if capital value is the basis of valuation. If unimproved value is used then a rate of more like 3% can be justified. That at least would strike more effectively at land bankers.

Would it work? This question is central; otherwise a land tax becomes just another tax. The case for a land tax has to be based on its ability to restrain property price increases.

Based on overseas evidence we know that a CGT does not achieve this goal. The proponents for a land tax have to be able to show, either through empirical evidence or theoretical study, that it will have a moderating effect on price increases. Any greater effect than that would show the tax rate is too high. It would stop investors and entrepreneurs from investing in property or buying land for subdivision. That would restrict supply and have the effect of further pushing up prices. And that would be a rather self-defeating outcome.

At the very least the proposition has to be robustly tested. Are there policy analysts in Treasury and the Reserve Bank looking at this option? If not there should be. And we should be able to see the results of their work.

Comments (13)

The proponents for a land tax have to be able to show, either through empirical evidence or theoretical study, that it will have a moderating effect on price increases

Only if it's sole ambition is to restrain prices. If instead it's proponents wish to find a replacement for Income Tax and GST that they feel is more fairly levied through ease of administration and inescapable then it's effect on prices is incidental.

I suspect some of it's proponents also see it as a stealthy way to relax building restrictions - if a distinction is made between reserved or farming and urban land for levels of taxation a land tax motivates cities to expand their taxable area by relaxing restrictions on what may become taxable urban land.

The price of building a building a house isn't that high: I can buy a brand new 4 bedroom house with double garage down country for 600K.

The problem is land availability in Auckland.

There may be some merit in taxing 'land bankers' - people sitting on undeveloped land for years within city boundaries. But by far the biggest problem is the overly restrictive consent process wielded by the council bureaucrats. The multitude of petty and unreasonable restrictions within the rules just add cost to a project. Both the rules and the team administering it need a thorough clean-out.

Auckland has the population of a Chinese provincial town in the land area of Beijing. It is NOT a problem of land availability. There may be a large supply of land outside the current urban area, but at some stage we have to say that it is not good economic value to use more of the best farm land (or scenic amenity area) for housing.

Local body fees may be unnecessarily high but only by a few thousands (i.e. they add less than 1% to the value of a home in Auckland). They are also not a significant problem.

The problem in Auckland is mainly that the number of homes being built is not keeping up with the population growth. Short of a major economic collapse there is no real financial instrument that will make a big dent in the price growth. While people believe that prices will keep increasing and there is money available then they will keep buying.

So yes a land tax may be a good thing (as is a CGT for fairness sake) but again it will not stop prices rising.

You either encourage more building (and realistically speaking it has to be higher density), or you discourage people from moving to Auckland. Big cities attract people but they also repel them. It is not a forgone conclusion that population drift has to be one way. It is a combination of geography, climate and government policy that has favoured growth in Auckland.

There is not much that can be done about climate (what IS being done will result in less land being available as the lower lying regions get swamped). Geography will also favour Auckland as migrants like to be near the main international airport.

However, government policy can make a difference to encourage growth outside Auckland and slow its growth.

It is a conversation to be had. Do we really want to get to the point where half the population lives in Auckland? Some other countries (big and small) have a similar problem as their biggest cities gobble up the rest, but many don't. Federal countries (usually bigger) do better at spreading their population. Finland might be a model for us.

With a net migration gain of 1200 people per month to Auckland I can see two solutions. 1. Reduce this rate of net migration. 2. Make migration conditional on building a house not buying from existing stock.

Based on the evidence from the larger Australian cities a CGT seems to have little or no impact on house prices.

I don't think anyone has said that a CGT would limit house price growth irrespective of anything else. The Australian Treasury estimates that tax subsidies for private housing cost the commonwealth around $46billion. By way of comparison, the CGT raises less than half that amount. The Australain CGT probably has a limiting effect on house prices, but it's outweighed by other factors.

There would need to be an exemption for land primarily used for farming.

I note most of the comment has been of increasing supply and on the impact of migration. which is fair enough since they are the main drivers of price.

In those parts of New Zealand without significant population pressure (pretty much everywhere apart from Auckland, Christchurch, Hamilton, Tauranga, Queenstown, and certain beach lifestyle places), housing is reasonably affordable. Having said that the exceptions cover more than half the population.

I certainly can see Auckland having 50% of New Zealand's population. In most Australian states, the main city is typically 75% of the population, except Queensland where Brisbane is around 50%. New Zealand is essentially the equivalent of a major Australian state in terms of size of the economy and the size of the population.

BeShakey, the proposed exemption for farming is because farming is simply not profitable enough to sustain such a tax. In effect the proposal excludes all land zoned rural.

It seems... odd for an industry to be exempted from a tax because the industry isn't profitable enough. Wouldn't this essentially be a government subsidy to an unprofitable industry, risk introducing a range of odd behaviours to exploit the loophole, and make it more difficult to convert farming land to other, more profitable purposes? It also seems inconsistent with the general principle of simple taxes with minimal exemptions, which is pretty fundamental to the current NZ tax system.

If part of the idea is to get first home buyers started, with a reversal of trends in ownership/rental balance, would a rent tax (e.g. GST) alter that balance, or would it simply raise rents? If the market sorts these things out (yeah right?), this would be a way of reducing returns on rentals.

You can discuss whether or not this could or should apply to commercial and or farm leases as well, but I'm thinking not.

The reason farmland would be excluded (or at least have reduced land tax rates) is not that farming is an unprofitable business (which would raise concerns about it acting as a business profitability tax) but that farming requires large areas of 'unimproved' land for operations and by that nature cannot support a level of taxation calculated on the presumption of an ability to 'improve' land.

This is also true of forestry, wildlife sanctuaries, reserves etc.

Such a tax is a pressure to 'improve' land, thus if levied at any rate that encourages such must be applied to land that can, and is in the nations interest to, be theoretically 'improved'.

Which is why I suspect it's supporters partly want it because it becomes a pressure to extend the boundaries of land to be improved - thus undermining things like the RMA and City Plans that could be used to restrict the spread of 'improvements'.

Should make theft legal too. As we know from overseas experience theft still continues unabated despite its legal status. Overseas experience clearly proves that there is no need to make theft illegal.

As it is house speculation is an action that the tax code is set up to encourage. Is that what we want from the tax system? Also, perhaps anyone writing on this could also list their interest in the topic IE how many homes they own in addition to their primary residence.